Grant Awards Insulated From Termination Based On New Policy Changes

A District Court in Massachusetts ruled that federal agencies cannot use the termination clause in federal grant regulations (2 C.F.R. § 200.340(a)(4)) to cancel grants based on policy priorities identified after the grants were awarded. In State of New Jersey v. U.S. Office of Management and Budget (No. 1:25-CV-11816, D. Mass.), the court granted summary judgment to a coalition of 20 states, three governors, and the District of Columbia that sought a declaratory judgment to prevent the government from terminating at least USD5.4B in active grants. The decision insulates grant awardees from shifting political priorities and confirms that the “program goals and agency priorities” are established at the time of grant award, not at the time of termination. Below is what grant recipients need to know.

About the ruling

The court interpreted the standard termination clause applicable to most federal grants, 2 C.F.R. § 200.340(a)(4). The provision states, in relevant part, that a “federal award may be terminated in part or its entirety ... if an award no longer effectuates the program goals or agency priorities.” Since January 2025, the Trump Administration has relied on this language to terminate billions of dollars in federal grants to programs related to clean-energy initiatives, public health, education, DEI, immigration, and other policy areas, which had been targeted by Executive Orders.

The court rejected that interpretation, writing: “After review of the plain language, regulatory scheme, regulatory history, the Spending Clause of the U.S. Constitution, and defendants’ argument regarding the implementation of the president’s vision, the court agrees with plaintiffs and finds that the Termination Clause does not permit agencies to terminate grants based on program goals and agency priorities identified after grants were awarded.” In the court’s view, the clause was intended to allow agencies to terminate grants if a recipient failed to meet the goals laid out in the original notice of funding opportunity, not to rewrite what amounts to an existing contract based on different policy priorities after the grant award.

The court emphasized that grant regulations governing federal funding require that applicants have advance notice of the program goals and agency priorities for an award, and that agencies monitor the recipient’s progress in meeting those requirements. The court also held that allowing post-award termination based on the Administration’s or agencies’ new or changed priorities would undermine the entire grant framework and violate the U.S. Constitution’s Spending Clause.

In rejecting the government’s argument that the decision impedes the president’s ability to implement his policy vision, the court wrote: “Nothing in this interpretation of the Termination Clause limits the President or Agencies from setting program goals and agency priorities before awarding new grants. The regulation, as declared by this court, demands only that grantees be apprised of those goals and priorities before grants are awarded.” We expect the government to appeal the decision.

Key takeaways for grant recipients:

• Compliance with new Administration policies not a basis for termination. Existing federal grants are protected from termination based on the Administration’s or agencies’ new policies or goals, instituted after award of the grant, that were not disclosed to the grantees in the original notice of funding opportunity.
• New conditions on new grants are permissible. The ruling does not prevent the government from placing conditions on new grants. The Administration remains free to set new program goals for future grants. Grant recipients should closely read notices of funding opportunity for announced program goals and agency priorities, and for related compliance requirements.
• Document compliance with original grant terms. Grantees must continue to comply with the terms and conditions imposed in their grant awards.
• Scope of relief. The decision does not undo the termination of any existing grants, as it applies only to prospective, future terminations. While the court’s declaratory-judgment ruling is applicable only to the plaintiffs in this case, because of the broad nature of the declaratory relief prohibiting the government from using the termination clause in 2 C.F.R. § 200.340(a)(4) to terminate grantees based on agency priorities or goals identified after a grant is awarded, grant recipients in other jurisdictions facing similar termination actions may look to this decision as persuasive authority. Impacted grantees should consult with legal counsel and assess their own legal options.

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